BY CARL-ERIK ISACCSSON
STOCKHOLM, Sweden - German Chancellor Helmut Kohl suffered a political setback when he was forced to back down from proposed tax reforms by the social democratic opposition. The measures were supposed to be Kohl's platform for the upcoming elections next fall. Kohl and his minister of finance, Theodor Waigel, touted the tax changes as a way of boosting economic growth and creating jobs for the more than 4 million unemployed workers there.

Waigel's original tax proposal would have reduced the national tax bill by some DM30 billion ($16.4 billion) in 1998-99. The social democrats rejected the proposals, arguing that it is "hardly any tax reduction for a normal employee, while the top tax rate would be drastically reduced." On August 14 Kohl stressed his willingness to compromise on the budget, saying, "If we can't do everything at once, that let us do at least a part."

Also on the point of collapse are plans to supposedly boost job creation by cutting statutory social security contributions by employers, which cover benefits such as unemployment insurance and pensions. That could foil government plans to shift the financing of the state pension system by reducing employers' contributions and increasing the value added tax (VAT), a form of regressive sales tax. Any VAT increases would have to be approved by the Bundesrat, the upper house of parliament, where the opposition Social Democratic Party (SPD) holds a majority.

Kohl opened the election campaign for his Christian Democratic party by accusing the social democrats of "treason" against the unemployed. He vowed to go "from village to village, from city to city" in a year-long campaign to denounce the total blockade of his proposals by the opposition. Capitalists and their spokespeople in Germany accused the politicians for having buried Germany's chances to emulate the kind of "supply-side" tax remedies that have benefited the economies of the United States and Britain - that is cutting taxes on the employers.

In mid-July the German government had to present a supplementary budget for 1997, in order to reduce the budget deficit to 3.0 percent of gross domestic product, as stipulated in the convergence criteria for the projected European monetary union (EMU). To meet this aim, the new budget included increasing state borrowing from DM53.3 billion to DM71.2 billion. Other measures include selling off more of the state-owned communications company Deutsche Telekom and selling some of Bonn's oil reserves. Because it would push borrowing to DM20 billion more than state investments, the budget is unconstitutional if the government isn't able to prove that it is due to a temporary "socioeconomic unbalance."

Kohl's argument is that the increase in unemployment meets this criteria, but the economy is now back on track for growth and for the next two years the amount to be borrowed will fall to about DM58 billion. The supplementary budget for 1997 and the budget proposal for 1998 will be debated and decided in the lower house of parliament, the Bundestag, early this fall.

French gov't raises corporate tax
The French government also has problems with the deficit criteria. The government of Socialist Party leader Leonel Jospin announced measures July 21 that would reduce the deficit by 0.4 percent, or $5.3 billion - leaving it slightly above the 3.0 percent. French minister of finance Dominique Strauss-Kahn said the corporate tax rates would be raised to 41.6 percent from 36.6 percent for companies with annual sales of over $8.3 million. The increase will apply to this year and 1998. The tax will then gradually be lowered again. Corporate capital gains, previously taxed at 19 percent, will be permanently taxed at the same rate as profits. This "euro-surcharge," as it has been dubbed by commentators, will bring in two-thirds of the $5.3 billion. The rest is projected as spending cuts in the military budget and as a special contribution from the profitable state-owned electric utility.

In his election campaign Jospin criticized sales of state-owned enterprises, promised to shorten the workweek to 35 hours with no cut in pay and create 700,000 jobs. He is now retreating from these promises.

French capitalists reacted angrily to the tax increases. "Raising taxes will slow growth," said Georges Jolle's, vice president of the employers' union. "France already taxes too much, and the state spends too much." The French government has not set a specific target for the deficit, and it is likely to be 3.1 to 3.3 percent, still above the Maastricht criteria.

If that is enough for France it will be hard to deny the governments of Italy, Spain and Portugal the same treatment when they try to enter the monetary union. All three seem likely to come just above the 3 percent target. Already the prospect of a European Monetary Union that includes a wide range of states and points in the direction of a weak euro has raised opposition within the ruling class in Germany. Proposals for a controlled delay of the project have increased lately.

Since last August, the D-mark has dropped about 18 percent against the dollar and 32 percent against the pound. Many capitalists view the British currency as a haven from "euro-related turbulence," because London has indicated it will not join the euro at its projected start in 1999.

Growing gap between east and west
In early August the German central bank, the Bundesbank, began hinting that it might raise interest rates. That would put upward pressures on interest rates throughout Europe, potentially devastating economic growth throughout the region.

The official unemployment figures in Germany rose from 11.0 percent in June to 11.4 percent in July. Joblessness grew from 9.5 to 9.7 percent in the west, and from 17.3 to 18.1 percent in the east. The gap between the west and the east is increasing. While the weakening of the D-mark has stimulated exports, activity in the domestic market is low, especially in construction. In the west 30 percent of the goods produced are exported; in the east it is just 10 percent. The part of the GDP that accounts for construction is as high as 14 percent in the east, compared to 7 percent in the west.

Productivity in the east for 1996 is estimated at 60 percent of that in the west, and wage costs per unit are still 20 percent higher than in the west. The Munchen-based Ifo financial institute is proposing a wage freeze, or even wage cuts, as way of making the east competitive. They estimate that unemployment will rise to 18.4 percent in the east in 1998, or 1.35 million workers.

Interviewed in the German weekly Der Spiegel, German finance minister Waigel stated that Germany has become a poorer country since reunification and can no longer pay the lion's share of the European Union budget. He threatened to block the EU funds for weak regions. Waigel said that Bonn annually contributes DM20 billion to the net costs of the European Union budget, and proposed reducing that to DM7 billion.

Helmut Kohl recently welcomed President Aleksander Kwasniewski of Poland with the words "Poland is without doubt a part of Europe" and continued, "But an even more important point is that one must realize that without Poland the European Union is nothing but an incomplete torso."

Relations between Bonn and Moscow also play an important role in the enlargement of NATO. According to the Herald Tribune, senior chancellery officials say that Kohl has promised that Bonn will do nothing to harm Russia's security interests. This new "Ostpolitik" is being pursued both by Kohl's governing coalition and by the opposition social democrats and many Green party members.

Carl-Erik Isacsson is a member of the metalworkers union in Sodertalje, Sweden.  
 
 
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